Crypto Academy Season 3 Week 2 Homework Post for (@asaj) - Market Psychology & Trading Psychology

This week lecture is about the Market trading and trading psychology. The efficient market hypothesis is also discussed in detail.

1- The case study given is an example of what type of psychology? Explain the reason for your answer.

Whenever a person behaved emotionally in trading, it is counted as trading psychology. The trading psychology is the emotion and mindset of a person which effect the trading decisions of individual at a particular period of time.

The market trends change continuously. We perform the technical and fundamental analysis to predict the market future. We consider many things before making an investment. But without the trading psychology, one cannot do the trading successfully. It also an important thing to consider while trading.

The given case study where a girl Jane bough the coins in 15$, and price of those coins was 9$ a few time ago. She didn't bough the coin in 9$. This case study is an example of Trading psychology.

The Jane showed the emotional behavior toward the trading. She had lack of trading psychology. His lack of trading psychology resulted in lose and she end up with a lot of money lose.

Initially the price of coin was 9$. Then after some time, the price raised to the 15% and there was a clear benefit of 66%. JAne didn't buy the coin in first phase but when she saw that the market is growing, she bought the coins in 15$. This was a mistake. She bought the coin in high price as compare to 9$. Moreover she made this decision while being emotional without doing the analysis.

After some time, the market raised to the 20%. The jane got the profit of 33% but she kept waiting for market further rise and didn't sale the coin. She kept holded the coins in market uptrend. That was an another emotional decision.

Then the market started downtrending. For sure, there is downtrend after every uptrend. She though that because price of coin is low now, so she bough more coins . It was her another big mistake that she bough the coin even when the market was going down.

When the market reached to the 5$, the Jane became emotional. She became mad while seeing this high fall. She made an emotional decision and sold all the coins to save herself from the more lose. She sold the coins in market down trend and faced a big lose. The market crashed some more but after some time, the market started rising again and Jane started repenting on her decision.

She made the decisions in emotion and ended up her trading in lose. We should always perform the analysis so that we come to know about the upcoming market trend. We shold behaved emotionally while trading. Always buy the coin when market is down trend and sell the coin at uptrend. Don't be panic when market crash, wait for uptrend and keep holding the coins. Always control your emotions and keep clear when to enter in market and what is exit spot.

2- Using the case study above, list and explain at least 5 biases that influenced Jane's trading behavior with examples of how it affected her behavior?

I have observed the five Biases in above case study. I will explain each one by one.

1- Emotional Bias

The Jane showed the emotinal attitude in her trading journey. She first become emotional when she saw the coin raised to 66%. She bough the coin in 15$. Then when market reached to the 15$, she didn't sell the coin and kept waiting for more raise in market price. She became emotional and end her trading in bad way.

2- Herd Mentality Bias

JAne act according to the Herd psychology. She didn't perform any analysis before entering the market. She just followed the Telegram and bough the coin when even it was not the entry point. She followed the crowd and her this act drown her in bad way.

She didn't performed the research before entering the market. She bough the coin when she saw that the market is going up and others are also investing in coin. Instead of buying the coin in 9$, she buy the coin in 15%. It's all because of lack of trading psychology.

3- Confirmation Bias

Being a human, we do not accept our mistake. We try to show that we are happy on our decisions. We first make decisions and when it goes wrong, we blame other for that.

Jane did the same. First she not sold the coin. Then when market got crashed she sold the coin in 5$. She showed that she is happy on her decision. When market crashed more she became happy that she saved from high lose. But when the market started rising, she started repenting and blaming others.

4- Disposition Bias

Some time this mat happen that traders buy the coin when market is trending down. The price is low so trader consider this a good chance to buy the coins at low price. Even knowing that market is trending downward, they buy the coin to balance their trading position. But this cause a serious lose most the time.

The JAne did the same. When she saw that market is going down and coin price is low, she bough more coins. The market was falling down and Jane bough the coins at that time. She though the market will rise after some time. But thing didn't act according to her and she faced a big lose.

5- Self attribution

Being a human, we have some bad habbits. We do not give the credit of our success to any one. But if we have lose, we blame others for that.

The Jane did the same. When she sold the coin, she was happy that she saved her from lose as market fell more. She was fine and relax for her decision of selling the coins. But when market started uptrending, she started repenting and blaming the other. She started blaming the stop loss investors because market started rising again and not she could not control her emotions. She blamed others for her own decision and mistakes.

3- List and explain how each bias you have mentioned can be avoided?

1- How to avoid emotional Bias

By doing the proper research and performing the analysis before making investment may safe us from being emotion in trading journey. It can save us from money lose. We always make the wrong decisions in emotions. So if we do some research before entering the market, we would have some idea of market next movement. So we would be mentally ready for that and won't be panic. We won't become emotional and won't make the wrong decisions for which we have to suffer in future.

2- How to Avoid herd mentality Bias

We should do some research on coin in which we are going to invest. We should not follow the others. We should do the work of our own side. We should perform the technical and fundamental analysis and then should enter into the market. Following other may lead us toward money lose.

3- How to avoid Confirmation Bias

Jane sold her coins in 5$. She followed the stop loss term and sell her coins. She faced a big lose but at starting when she she that the market is falling more, she became happy at her decision. She though she saved herself from a big lose, but when the uptrend started, she started blaming the inventors of Stop loss. She started blaming others.

We should not blame other for our wrong decisions. We should learn from our bad experiences and should have courage to accept our mistakes. We should always think from all the sides before making decision.

4- How to avoid the Deposition Bias

When the market is rising up, we should sell our coins. And when the market is down, we should buy the coins. The JAne became greedy. She didn't sell the coins in 20$ and keep waiting that market will rise more. When the downtrend started, she bough more coins thinking that the market will rise and these coins will make. profit a lot.

We should not make the decisions in hurry. We should have plan out trading. We should have planned in advance how much investment we can afford and act accordingly. Buying the coins again and again may cause a problem. We should always wait for market uptrend for selling the coins.

5- How to avoid the Self attribution Bias.

We know that the market fell and rise again and again. We should always wait for right moment to take a step in crypto market. When market fell, the Jane sold her coins and was happy at her decisions but later when market rise, she started blaming the market, stop loss investors and other for her decision.

Instead of blaming others for our lose or making wrong decisions, we should wait. We should wait for a proper time for buying or selling the coins.

4- What type of analysis can be used to monitor market psychology and trading psychology, and why? Identify the differences between trading psychology and market psychology.

We perform a variety of analysis before entering into the market. We perform the technical analysis and sometime the fundamental analysis goes best. Its all according to the situation. These analysis helps us to predict the future market trend. We come to know what is entry point and what is exit spot.

For market psychology and trading psychology, the analysis which goes best is technical analysis. Technical analysis will go best for monitoring the market psychology and trading psychology.

This analysis help us to predict the market moments. We get the idea of what will happen in market next. We get to know whether the market will rise or fall and then make decisions accordingly.

In market psychology, multiple investors effect the market moves. But in trading psychology is emotions and behavior of person regarding to trading and market. In both cases the Technical analysis work well. This analysis helps us to predict about coins future price and trend.

The RSI indicators are used here to get the idea when to enter into the market and when to exit the market. The multiple other indicators are used to decide what next step should be in market. What should traders do considering the future of market which is predicted by the technical analysis.

Before trading, just open the chart for once and look at it carefully. there are multiple indicators which will help you to decide what amount should invest, what will future price, when to enter and when to exit the market.

The trading psychology can be define as the mindset of a person or behavior of an individual toward the trading How his emotions effect his trading decisions. But market psychology is different from it. Market psychology is happen when the more than one trading communities occur. This is perform on community level.

Difference Between Trading psychology and market psychology

Trading psychology shows the behavior of single person toward market. While market psychology shows the behavior of whole community toward market.

In trading psychology, the moves of single person do not have much effect on market moves. But in market psychology, when whole community move, the market direction also change accordingly.

The trading psychology cannot be more helpful in taking the decisions about the crypto trading. But studying the market psychology help to make the decisions.

5- How can you measure market psychology using a crypto chart? Select 5 trading biases and explain with screenshots of any cryptocurrency chart how the biases can cause a coin to be oversold and overbought. (Add watermark of your username)

Trending Chasing Bias

In the above graph, we can see clearly that the some traders are chasing the trend. They are following the trend. Such traders most of the time end there trading in the loss. We should sell the coin when the market is up but in above graph, people keep holding the coins and keep waiting for market more rise. They keep chasing the trend.

Emotional Bias

The above graph shows that some investors are showing the emotional attitude. Some are buying the coin in market uptrend and some sell the coin when market is crash. They green candles in market uptrend showing that some investors are showing the emotional attitude and buying the coins in high price. The red candles in bearish showing that some investors became emotional and sold their coin in low price.

Confirmation Bias

There are some traders who kept holding their coins in market uptrend. They keep waiting for more rise and at the end, when market started downtrend, they became panic and they had to sold their coins at low price.

Herd Mentality Bias

Some people followed the trend and sell their coins in huge amount before the downtrend start. They didn't perform any sort of analysis to know that the price is rising so high. But when they sold their coins, the price fell and downtrend start.

Disposition

In the above graph, when the market is down, we can see that many traders are still buying the coin thinking that this is best to buy the coin in low price. They market fell more and they had loss. When the market crash, such traders then sold the coins and had to face much lose.

6- In your own words, define the term efficient market hypothesis (emh). List and explain the advantages and disadvantages of efficient market hypothesis (emh).

According to this theory, any latest information and news in crypto market reflected the coin price more quickly. When the prices of coins are reflected by the information, such market is known as efficient market and when the price of any coins are reflected by all the information in efficient market then this is known as EMH.

Personally i feel that this theory is more profitable. This trend is profitable to great extent because the profit ratio on technical and fundamental analysis is not as much high. This theory is not being used in large scale in market nowadays for large crypto assets. According to this theory, Any random preference is more valuable and beneficial for traders. It is more important than any kind of analysis.

Advantages

The economy rise because o this theory

Profit rate become more and traders get more reward

The technical analysis some seems difficult or the traders to analysis. No need to spent time for analysis.

Save time which we spent on analysis

More the versatility in price, more the profit rate

The market rise because the market volume increase.

Disadvantages

The risk is usually high in such cases. The people do not use it more because the risk is comparatively high.

The price of asset remain high as usual

Conclusion

In this lecture, the professor explained the trading psychology and market psychology in detail. The trading psychology is mentality and behavior of individual which effect his market decisions and market psychology occur when trading communities perform. We than learnt about the Market Hypothesis and discuss the cons and prons of it. Thanks you so much professor @asaj for this lecture.